Sunday, February 28, 2010

One possible good outcome of President Barack Obama’s recent very public exercises in politics is that they may box him into a political corner — a corner in which he is forced to something far more practical he would naturally tend to do.

On the subject of health care, it was folly to try to undertake health care reform without addressing the subject of cost savings. This was the same mistake that Hillary Clinton made more than a decade earlier. Both proposals, in their various forms, would have restructured the health coverage process to make it more inclusive, but would have deferred the subject of cost savings for later — “kicking the can down the road,” something Obama said must not be done, even as he proceeded to do it.

If Congress had started with the more modest task of creating a public health coverage mechanism for federal government employees, it could have been done by now, and the federal budget could be enjoying perhaps $30 billion in cost savings in the current fiscal year. This sounds like only a tiny piece of the puzzle, until you remember how many civilian federal employees there are; it would be much more than a token change. Then, with cost savings generated and demonstrated, it would not be so hard to expand the program in one direction or another. I do not always advocate such an incremental approach, but taking small steps now is almost always preferred to large steps that must be delayed for five to ten years.

Until the costs of health coverage are properly addressed, the federal budget will never balance, so this is a subject that will not go away. Congress will have to consider alternatives to contain health care costs in the new budget, and I hope they will consider something practical that will allow some group of health care consumers — it scarcely matters where they start — to escape the morass of paperwork and fraud that the private health insurance system has become.

Saturday, February 27, 2010

It turns out that unemployment at the end of January and in the first half of February was not really falling after all. Bad weather and power outages had delayed around a million people in filing unemployment claims. It also prevented many people from seeking work, and those who are not out looking for work for a week at a time, even if it is because they are prevented by the weather, are not counted as unemployed.

Two epic northeast winter storms in February were already enough to make the month’s economic statistics look very bad, and a third large-scale storm affecting Northeast cities at the end of the month, even if not as widespread or intense as the two previous storms, can only further depress the economic statistics. The weather will have an effect on most of the indicators that economists look at to determine the direction of the economy. Real estate transactions, for example, will be down, both because of postponed meetings and because houses may look smaller and less impressive when buried in snow. Hours worked per week, retail sales, and hotel occupancy rates will all be adversely affected. But it is not all bad. Foreclosures and bank failures will be slowed down too.

Friday, February 26, 2010

Bank of Clark County, which failed last month, was in worse shape than it appeared in 2008. The failed bank’s Chief Lending Officer, in a plea statement entered in federal court last Friday, hinted at a plan among bank employees to misrepresent the value of real estate development projects that were the subject of loans from the bank, going back at least to early 2008. The statement also reveals that the bank already knew at that point that its future was in doubt and had started seeking a buyer, a process that ultimately failed.

FDIC-insured banks made an aggregate profit of less than $1 billion in the fourth quarter. Without the run-up in the stock markets, banks’ collective losses would have been substantial. Asset quality deteriorated. That is a trend that will continue at least until the real estate market stabilizes. A positive note from the quarterly results, though, is that more than two out of three banks are still making a profit.

Bank of America may have drained more than $1 billion from its customers’ accounts through its affiliation with a subscription service called “Privacy Assist,” an estimate based on details provided in a class-action lawsuit filed in federal court last week. The lawsuit claims that Bank of America enrolled customers in the subscription without their consent and refused to assist customers who had not ordered the service in canceling it. Bank of America has been telling customers who have inquired that it is not affiliated with the service. More recently, it has been telling reporters that it is proud of its affiliation with Privacy Assist, but it is not the provider of the service. However, Bank of America hosts the web site for the service, and press releases found on the Bank of America web site indicate that the service is provided by its FIA Card Services subsidiary.

Washington state bank regulators closed Rainier Pacific Bank, which had 14 offices in the Tacoma area and $446 million in deposits. Umpqua Bank, already one of the biggest names in banking in the area, becomes bigger with the acquisition of the offices and deposits and 93 percent of the assets.

The failed bank had formerly been organized as a credit union, and it expanded aggressively after its conversion to a bank holding company in 2003. Over the next three years, it spent millions of dollars on new offices, computer software, and two insurance companies. It was that pattern of heavy spending and a business plan based on high operating costs, more than the subsequent loan losses, that led to the bank’s failure.

The state of Nevada closed Carson River Community Bank tonight. The bank had $50 million in deposits at one location in Carson City. The deposits are being transferred to Heritage Bank of Nevada, which is also buying three fourths of the assets.

The two bank closings tonight are estimated to cost the FDIC $103 million.

The NCUA liquidated two credit unions this week. Yesterday, it was Friendship Community Federal Credit Union, in northwestern Mississippi, which had 685 members and less than $1 million in assets. Membership accounts were transferred to Shreveport Federal Credit Union. Today, it was Mutual Diversified Employees Federal Credit Union, in Santa Ana, California. It had 748 members and $6 million in assets. Membership accounts are being transferred to SchoolsFirst Federal Credit Union.

Thursday, February 25, 2010

It now seems to be a consensus that foreclosures this year will be higher than last year, that is to say, the rate of foreclosures will set a new record. At the same time, new home sales were at the lowest level ever recorded in January. New home sales are normally low in January, but the rate has fallen below the lowest level recorded in the 1970s.

And perhaps that makes sense. The adult population is not growing as fast now as it was then, and Americans are moving away from housing in a big way — witness the apartment vacancy rates, still increasing in spite of lower rents, and in spite of the record rate of foreclosures.

The decline in the consumption of housing does not bode well for the sale of furniture. People who are giving up a three-car garage will find it harder to add an extra car, and if there is a shorter commute, there is less need for it. With fewer closets and shelves, it is hard to buy so much clothing and so many trinkets. With a smaller living room, or one shared among more people, the number of large-screen televisions required goes down. Scaled-down housing also means less money spent on energy for lighting and climate control. Consumption of almost all kinds would seem to diminish as housing diminishes. And this would seem to hold true whether people’s housing reduction is involuntary, in the form of a foreclosure, or voluntary, undertaken as a strategy to live a more comfortable life.

Yet this should eventually work to the advantage of most forms of public accommodation, from libraries to nightclubs. People who live in smaller houses or share a house with more people tend to go out more often — and they have time to do so, because a smaller home takes less effort to take care of.

So, as an initial approximation, I am looking for the trend away from housing to be accompanied by a decline in manufactured products, but an increase in nights out on the town, and perhaps in travel, although not necessarily by airplane.

Wednesday, February 24, 2010

At street level, the U.S. economy is showing only faint signs of stabilizing. The past month will look atrocious when the economic statistics come out, as weeks of snow cover in the northeast quarter of the country discouraged people from going out of the house for most of four weeks and put a damper on the economy. More than half of the U.S. population was affected by this series of weather events, as the winter weather began with a freeze in central Florida. The snow and cold surely reduced many households’ spending by 20 percent for the quarter. This is an effect large enough to drag down GDP for the quarter by 1.5 percent, which would be widely reported as a 6 percent decline because of the way journalists like to report GDP in annual rates. A report of a 6 percent decline, if that comes to pass, will sound disastrous enough to have people predicting a depression again. It’s a conversation that is sure to diminish the already low confidence of consumers in the economy.

The weather may already have dampened consumer confidence, which was reported yesterday at levels close to the lowest levels of the recession. Harsh winter weather affects consumer confidence at many levels. The weather directly changes people’s moods and introduces obstacles and frustration in daily activities. At the same time, higher heating bills put a damper on consumers’ ability to spend. The heavier use of fuel for heating turns into higher fuel prices. The cost and effort of snow removal put a strain on consumers’ budgets and schedules, and they also strain local government budgets.

This may lead local councils to cut back the already austere budgets they adopted in December for the year that has just started. Other governments are early in the planning stages for a fiscal year that runs from July to June, and the current deficits, compounded by the costs of snow removal, will weigh on their minds as they prepare the new budget.

The only possible result is further cuts in essential government services. KYW has a story listing the challenges facing the Philadelphia budget, which is due to be announced at the beginning of March, and the same story is being repeated in cities and towns across the region and in most of the country.

Tuesday, February 23, 2010

In my last post, I focused on the problems caused by the low status of students in the tradition of schools, and the way the arbitrary nature of the Druid-influenced graduation ceremony has contributed to this. Another bizarre quality in the tradition of schools is the relative secrecy in which they operate. In particular, if you are not a student in a class or its instructor, it traditionally is virtually impossible for you to get any accurate information on what goes on in the class.

The Internet, however, is changing this. It is shining a light on the educational process that wasn’t there before. Most colleges and universities post their course catalogs online for the public to look at. The requirements of degree programs are also typically posted online, in enough detail that you can guess what courses you would take to complete the degree program. Then, for each individual course, there is an excellent chance that you can find a syllabus for the course posted online, if not from the same college, then from a different one. The syllabus tells you in relatively specific terms what you need to study and learn to complete the course.

Armed with this information, you could simulate an entire college education at home, or wherever in the world you happened to be. That’s not to say that it would be easy to do. A college student who is thorough about his or her studies may spend 15 hours a week on a college course — 3 hours in class, and 4 times that in reading and assignments. Multiply that by 5, for the usual five courses in a semester, and that’s 75 hours a week. Do that for the 120 weeks of a traditional college education, and you’re talking about a major time commitment. It would take at least as much time to study the same material without the benefit of a college. A student would need a lot of self-discipline to stick with this approach. Yet the idea of saving $150,000 to $300,000 — the price of a small house — can be a powerful motivating idea, especially for someone who doesn’t have a realistic chance of putting that kind of money together.

I believe we have reached the point where a student who has more self-discipline than money should not be looking for a college loan, but for a support system that would enable them to study without paying for the overhead of a college.

To make this easier, I believe it would make sense for the U.S. government or educational charities to take $100 million or so out of student loan spending, and spend this instead on online instructional materials for the benefit of students who, even with the availability of loans, cannot afford to go to college. For $100 million, you could create a huge amount of instruction materials — movies, readings, quizzes, and more — covering basically the entire college curriculum. These materials could be distributed online, year after year, at a trivial cost, and not just to the United States, but to anyone in the world who could find Internet access. Yet this amount of money is a drop in the bucket compared to what is spent on colleges every year.

To be sure, many students, perhaps most, need the structured environment of a college to maintain their focus on what they are studying. Yet this is not a reason to ignore the millions of students who could guide themselves through their own education, if given a token level of support and encouragement.

Monday, February 22, 2010

When I wrote a day ago that a criminal investigation would surely be forthcoming in the story of a school district that had been using spyware to take webcam pictures of its students during off hours, I didn’t know that the first subpoenas had already been issued. The whole sordid episode highlights the culture clash between the schools and society at large. The two groups have vastly different perspectives on the status of students. To schools, students are viewed virtually as property, with a status scarcely elevated above that of slaves. This is the only way to explain how a school administration could think it appropriate to install spyware on student computers and use it to take pictures of the students, and potentially others, in the privacy of their homes. If the school staff thought of the students as citizens, it would immediately have occurred to them that spying on them in this manner, even if done only once, even if done to investigate a suspected crime, would violate not just a web of state and federal laws, but the U.S. constitution, which includes a few words on the subject of “unreasonable search.” The fact that this system of spyware and spying was so taken for granted within the school that it was spoken of openly speaks volumes about the status of students, not just within that school, but within schools in general.

This schoolhouse view of students as the equivalent of property collided with the real world outside, however. Legally, of course, students are citizens and have rights. Legally, too, the school is a branch of the government, and as such is obligated to live up to the same standards of conduct imposed on any other part of the government. In the larger community, students are viewed not as the equivalent of property, but as highly valued members of society, in a capacity more akin to princes and princesses than slaves. So how does the dignity of a student disappear when the staff of a school enter the school building?

The problem, as I alluded to in my previous post, has to do with the cultural expectations of the way a school operates. It is expected in a school that students do not gain any status at all until they have completed all their studies and passed all their tests. This is a tradition that goes back to the days when the Druids were the strongest presence in education — that is to say, it goes back before recorded history. The easiest way to see the connection is to look at the graduation ceremony. For a couple of hours, students are asked to wear a stylized, modernized, cheapened version of a Druid costume — as if they have just completed Druidic training and are now being recognized as Druids. Except that when the ceremony is over, the students are not welcomed into a learned community, but are instead sent away from the school grounds forever.

If schools are to be reformed, I believe a small step in the right direction would be to do away with the traditional concept of graduation. The granting of a diploma at the completion of a student’s studies reinforces the traditional idea that these studies are valueless until they are completed. If 45 classes are required for a student to qualify for a high school diploma, and a student completes 44 of them, he or she is regarded not as nearly a high school graduate, but perhaps as a dropout — and that fundamentally doesn’t make sense. My suggestion is that schools grant “partial” diplomas to students who have completed any part of their curriculum, in order to recognize this partial success. Having a sense of proportion in recognizing students’ accomplishments is only fair, and it would go farther, in my opinion, in encouraging students to continue their studies than the current approach of withholding this approval until it is too late to make a difference.

Most importantly, it would give students a status that they don’t currently have. This, then, would force schools to recognize their students as people who matter — while they are still students. This changed status for students would encourage schools to measure their success as schools not in terms of grades and test scores, but according to what the students are able to do. That is a change that, I believe, could only improve the quality of the education that schools provide.

Saturday, February 20, 2010

I was just reading today about a rare Druid document, an astrological reference guide. The document was created, or copied, around 100 B.C., but astrologers who have looked at it say that it was based on astrological observations made around 1200 B.C., more than 1,000 years earlier.

When I hear about this kind of thing, my tendency is to ask, “How can people use knowledge for more than a thousand years without checking it and updating it so that it corresponds to their current surroundings?”

Yet we still do this. One of the best examples, in my opinion, is the idea of a school. We all “know” how a school is run, because essentially all the schools in the world use the same formula. Yet this knowledge is older, and more out of date, than we realize.

Alvin Toffler and others have complained about the anachronistic qualities of schools, employing as they do an industrial-age factory-style approach for students who will be working in an information economy, or perhaps something else that will supersede this. But that is not the half of it. If you strip away the physical form of the school building and its rooms, the institutional framework of a school has scarcely changed since the beginning of recorded history around 2,500 years ago, and most of the ideas we take for granted in running a school were probably basically the same for at least 1,500 years before that.

Yet the purpose and social context of the ancient schools were vastly different from the uses we try to make of schools now. Modern schools are descended from the groves where Druids secretly trained the new Druids, from the mystery schools of Egypt, and from their counterparts across the ancient world. In some cases, there is no mistaking the lineage: modern universities operate like the mystery schools, while medical schools, music academies, and American football teams operate more along the lines of the Druids.

And why? It doesn’t make sense when you stop to think of the purpose of the early Druid schools, or any of the schools of that era. The objective was to train outsiders. The main group of students for the Druids consisted of people of the agrarian social class who, in economic terms, were little better than slaves. In the early centuries, the student body surely also included savages, people who were not born into a functioning tribe or culture. The main purpose was to get the students to memorize the body of knowledge that belonged to the Druids so that they could function as knowledge workers, without giving away any secrets to the outside world. School consisted of repetition, memorization, and tests, loyalty was paramount, and students didn’t gain any status until they had finished all their training and passed all their tests. Anyone who wasn’t a student of the school would never see the classes taking place. Does this sound a little like every school you’ve ever come across? Did I mention that the Druids wore robes and had hats with tassels on them? It all made some sense for the purposes of the Druids, but it’s hard to make the case that this approach makes sense for the modern era — or even the medieval era.

The desperate problems in current schools are highlighted by three current stories: the Pennsylvania school district that was using the webcams of the students’ laptop computers to spy on the students in their homes, and now faces a class-action lawsuit with a criminal investigation surely to follow; the college professor in Oklahoma who thought it appropriate to freeze a laptop computer in liquid nitrogen, then smash it on the floor as a way to threaten his students; and the plight of those college graduates who, after a series of misfortunes, and in some cases despite having made hundreds of thousands of dollars in payments to the banks, have seen their student loan debt balloon to nearly $1 million.

It is that last story that most desperately calls for a new look at schools. Barely ten years ago, seeking a college degree was a no-brainer for a person who had the skills to do so. It was one of those gee-whiz statistics that a person with a college degree, particularly one from a prestigious university, could expect to make $1 million more in lifetime income than a person with only a high school diploma. But tuition has doubled, and the student loan racket has become more corrupt than it already was. An extra $1 million in income is nice, but if you end up paying $1 million for the tuition and the interest and fees on the student loans, it’s kind of a wash, isn’t it?

And so we have reached the point where student loans no longer make financial sense for many students. We have no choice but to look at the larger problem of the schools and say, “There has to be a better way.”

Friday, February 19, 2010

The Fed has started the slow process of relaxing its crisis posture. It raised the discount rate from 0.5 percent to 0.75 percent. That may be seen as a token move, but it is the first rate increase from the Fed in years. A discount rate of 0.75 percent still has to be considered an emergency rate, a high-risk posture that tends to destabilize the economy and the banking system, but the rate increase brings it one step closer to normal interest rate levels. The Fed also has apparently stopped buying mortgage-related assets and is preparing to sell some of them. This comes at the same time that the Treasury is preparing to sell another round of the securities it obtained in 2008.

In another sign of a relaxing banking system, large banks are starting to hire some of each other’s executives. There were several such moves announced this week, in an industry that has seen an unusual gap in high-profile hirings over the past 18 months.

The OTS closed La Jolla Bank tonight. The bank had 9 locations in California and 1 in Dallas, and $2.8 billion in deposits.

OneWest Bank is taking over the deposits and purchasing the assets. OneWest, one of the largest banks in California, was created last year out of the IndyMac Bank failure.

It was the second bank failure in La Jolla in less than three months.

La Jolla Bank had been actively pursuing foreclosures on its nonperforming real estate loans, which as of September were more than one tenth of its assets. At that point, the bank received a cease and desist order from the OTS. The bank was also squeezed by the high interest rates it was paying on CDs.

These smaller banks, each with less than $400 million in deposits, were also closed tonight:

George Washington Savings Bank, with four locations in the Chicago area. State regulators had issued a cease-and-desist order on December 4. Successor is Ohio-based FirstMerit Bank.

Marco Community Bank, with one location in Marco Island, Florida. The Fed had issued a prompt correction action order at the beginning of the month because of the bank’s dwindling capital. Successor is Mutual of Omaha Bank.

The La Coste National Bank, in Texas. Successor is Community National Bank, of the local area.

Thursday, February 18, 2010

The credit crunch may leave the banking industry with a bigger challenge than the current imperative of staying solvent. A mutual distrust is building up between banks and its three biggest categories of borrowers: homeowners, real estate developers, and consumers. The animosity between commercial real estate developers and banks has come out in an unprecedented wave of lawsuits in both directions. Unfortunately, in dozens of instances already, it has been both the developer and the bank that end up in bankruptcy.

The statistics show consumers and banks distancing themselves from each other to a degree that was hard to imagine just a year ago. Total U.S. consumer credit has fallen for probably 14 straight months, after basically never declining before. You can also see a shift at the grass roots level, where the Move Your Money campaign has caught on in a big way, defying the skeptics.

It has long been assumed that everyone needs to buy a house, but the scale of home mortgages could change drastically with a change in home buyer attitudes. A person who postpones buying a home for 7 years may be able to cut the size of the mortgage in half. They would end up paying only one fifth as much in interest to the banks. The book The 4-Hour Workweek became a bestseller in part by telling people innovative ways to avoid the burden of home ownership. Banks, for their part, have made it harder than ever for home buyers to apply for mortgages.

The same pattern is playing out in smaller categories too: small business lending continues to fall month by month, student loans are no longer seen as “smart,” auto loans are part of the reason auto sales are down.

While banks’ view of borrowers could change as soon as the next spreadsheet, borrowers’ new view of banks is further solidified with each week’s headlines and probably can’t be changed without some proof that banks have changed. But not many banks seem interested in making the changes that customers are looking for. Maybe this situation could be resolved by making customers lower their expectations. Or, maybe it will give rise to a new kind of bank.

Wednesday, February 17, 2010

Imagine if the new Federal Trade Commission (FTC) rules about disclosure were extended to supermarkets.

I’m not saying that’s likely. The FTC rules specifically target bloggers and blog commenters. The FTC doesn’t see supermarkets as the threat to civil order that bloggers apparently are.

Still, imagine what we would see if supermarkets had to live up to the same disclosure rules about marketing. Imagine seeing shelf tags on almost every supermarket shelf with a big dollar sign on them to say, “This product placement was paid for by the manufacturer.”

The public would finally find out why supermarkets are so large. Many people would be shocked to learn how much of the shelf space in a supermarket is paid for.

For the first time, it would be easy to see why the cereal and soft drink aisles are bigger than the produce section. It’s not about how much the store can sell, but about how much the big food factories will pay to put their boxes in front of people’s faces. The more the factories are willing to pay, the longer the aisles have to be.

If you really know your way around your local supermarket, take a stopwatch along next time, and find out how much time you take just walking from one product to another.

Imagine that your time is worth $1 a minute. That’s a reasonable estimate because if you have the pattern-matching skills to easily find your way around a modern American supermarket, it’s a likely guess that you have the capacity to do the kind of work that pays $1 a minute. Based on that estimate of $1 per minute, do you end up spending more money on your grocery-shopping trip, or more time?

The comparison comes out closer than most people would expect. Supermarkets might save you money — or at least they want you to think so — but they waste your time.

Supermarkets are set up to get shoppers to pay attention to products — not to let shoppers get their purchases quickly and efficiently. Supermarkets have to do what they can to force you to walk past the shelf space that’s been paid for. That’s how they pay the rent.

Tuesday, February 16, 2010

The more I hear about the budget problems in Greece, the more it appears that the crux of the problem is accounting. It was convoluted accounting mechanisms that allowed the budgetary imbalances to go undetected for so long, and various forms of funny accounting continue to make it difficult to properly measure the problem. In other words, it’s a little like the mortgage problems in the United States.

When you start to talk about funny accounting, a lot of people jump to the conclusion that the accounting is sloppy, like the corporate accounting of the 1980s, or that someone is cooking the books, calculating ways to rearrange the numbers to make them look better than they are. And no doubt, sometimes these things occur. But there is no particular reason to expect to find any of that in the Greek government budget accounts or in the exchange of mortgage-backed securities in the United States.

Funny accounting can occur by accident, but when companies and governments are managing by the numbers, it is rooted out and corrected only when it makes the numbers look bad. Otherwise, it tends to be tolerated. This is the reason why Wall Street companies didn’t notice the bizarre patterns of derivatives trading that many of their employees were doing to inflate their bonuses. These particular obligations were kept off the books, the result of an accounting rule that no one stopped to question because it wasn’t making the books look bad. By the time the companies got around to checking, more than a few of them had trillions of dollars in off-balance-sheet liabilities. Then, after some slight clarifications of the accounting rules, the volume of dodgy derivatives trades fell by more than three fourths.

In the case of Greece, there really is no crisis. All that is needed is an honest look at the budget accounts, followed by some honest decisions. All this will be easy enough to do now that people have taken a skeptical look at the accounting and have started to see it for what it really is.

Funny accounting happens naturally when institutions are managing by the numbers, and managing by the numbers tends to occur when institutional leaders are overconfident and the institutions they manage are under stress. Does this scenario sound like any multinational corporations or state or federal governments you’re familiar with? The solution, of course, is to root out the funny accounting before it becomes a crisis.

The U.S. federal budget took a step in this direction this year by eliminating the various accounting fictions that had kept foreign military adventures mostly off-budget for the past decade. Let’s hope Congress can chip away at some of the other accounting fictions that are lurking in the budget in time to get some more honest numbers into next year’s budget.

Monday, February 15, 2010

China’s government is at war with the country’s workers, and the productivity that is lost in the conflict is staggering. This is not just a matter of a large number of disheartened workers losing faith in their work, though that certainly is occurring. The tighter restrictions on workers have required many to put in extra effort to accomplish just a fraction of the work they used to do. This effect is highlighted in a new BBC News report about two fruit vendors who drive 1,000 kilometers to check their e-mail because the government has cut off Internet access in their province.

This is an inconvenience not just for them, of course, but for everyone in the province, and for their customers too. Multiply this effect by the number of people trying to get any kind of work done in China, and the new restrictions on workers must be costing China the productivity of at least a medium-sized country. The harsh rhetoric coming from the central government suggests that the crackdown will intensify in the coming months. China’s economy is already facing extraordinary external and internal challenges. It is hard to imagine how it could also support, for more than a short time, the added weight of a paranoid central government.

Sunday, February 14, 2010

NBA commissioner David Stern must have turned heads when he disclosed the estimated $400 million loss for the basketball league and its teams this season. It is not because the league is losing fans. Attendance at games has been trending downward, but only slightly, and the television audience is holding its own, thanks to improved HD picture quality. The problem is that the advertising doesn’t have the reach that it did just a few years ago.

Television advertising during game broadcasts pays for most of the costs of operating the NBA, with most of the money going into salaries for players, but advertising spending is down because the impact of advertising is shrinking. It is not just the switch from the cathode ray tube of old-style video screens to the less-hypnotic flat screen displays. Consumers are paying less attention to advertising in all forms. The recession has added to the pressure on consumers and reduced the amount of time they can spare for advertising messages, but so far there is no indication that this will let up when the economy improves.

In hockey, the NHL faced a similar predicament six years ago and ended up missing a season. The NBA and its players’ union had hoped to avoid that by starting their discussions early, two years before the current collective bargaining agreement expires. But a third of that time has already gone by without any sign of progress, and if either party is delaying and hoping for the TV money to come back before the deadline, the early start might not make any difference.

Saturday, February 13, 2010

In an era when most kinds of computer software are getting simpler and cheaper, one category remains stubbornly messy. That’s the software that big business runs on. The old joke is that it’s called “enterprise” software because it costs as much, and breaks down as often, as the U.S.S. Enterprise, the starship from Star Trek.

As a sign that the state of this category is perhaps a little worse than people say, it is getting harder to sign up growing businesses for enterprise software installations. Small business that grow to the level of about 50 to 100 employees, the point at which it’s possible to make a case for replacing the disorganized repository of electronic documents with some kind of enterprise software approach, aren’t considering enterprise software at all, but are tending instead to pay for a cloud computing approach.

Cloud computing is the most complicated computing architecture ever envisioned, and it tends to be priced accordingly. One of the most prominent examples of cloud computing is the Sidekick service provided to T-Mobile users by Microsoft. The service provides access to a tiny subset of the kind of software that comes free on a $450 desktop computer, but it costs much more — it’s part of a subscription for which users pay that amount every three to six months. Even at that price, the Sidekick service failed spectacularly five months ago, remaining partially offline for about two weeks and losing practically all the data that users had trusted to it.

You would think that kind of track record would make businesses hesitate, but I am afraid the track record of enterprise software is worse. Everywhere you turn, there are stories of enterprise software installations that went two years longer than planned and $10 million over budget. It’s enough to keep a business executive awake at night.

Enterprise software shouldn’t be so complicated. There’s a huge market out there for anyone who can persuade a medium-sized to large business to adopt the same kind of simple, stable view of business data that small businesses and investors use. That kind of enterprise software would have only a tenth of the complexities and idiosyncrasies that we’ve come to expect from enterprise software — and it could come at a tenth of the price. It wouldn’t have to cost a million dollars to develop or install, and it wouldn’t have to take weeks for the employees to learn. And most importantly, big businesses wouldn’t be misled by the view of their businesses they would get from this software, the way they are with the twisted, distorted picture that current enterprise software provides of their businesses.

Think of enterprise software as a way to look in the mirror. Big businesses are saying, “Our business isn’t flat, so a flat mirror won’t do. We need a big custom-molded mirror, no matter how much it costs.” The more savvy growing businesses are saying, “I don’t need a mirror, because I’ve got this webcam hooked up to a server in India that sends me snapshots by e-mail.” Meanwhile, everyone else in the world has this problem solved — they use any flat mirror that gives them a reasonably accurate reflection. It’s a solution that large businesses could adopt too, if someone could persuade them that it would work.

Friday, February 12, 2010

The Treasury lost $2.3 billion on its TARP investment in CIT Group, as the securities it received in the bankruptcy proceeding are now officially worthless. The Treasury could have received money following the bankruptcy if CIT had made a startling recovery after emerging from bankruptcy. Instead, CIT is still making halting moves toward restarting its business.

There were no bank failures reported this week, after only one last week. Bank regulators and the FDIC have surely been slowed down by the two heavy snowstorms that have hit the Washington area and much of the East Coast in the past two weeks.

Thursday, February 11, 2010

The White House’s proposal to invest a few billion dollars in nuclear power is a reflection of the same short-term thinking that got the United States into its current energy predicament.

There is no reason to believe that there is enough uranium accessible on the planet’s surface to power all the nuclear power stations already being built. The most pessimistic scenarios say that the world could run out around 2050, with prices for uranium rising so rapidly that nuclear power can no longer compete commercially as a source of electricity after about 2025.

A nuclear power plant envisioned in 2011, designed in 2014, built between 2017 and 2023 might just be coming online in 2025, too late to cancel the project, but also too late for it to ever be profitable. If the White House is not looking this far ahead, it is simply because most of the people in positions of responsibility there will be retired by then.

If you take the longer view, the efficient thing to do is to reserve the nuclear fuel for the existing nuclear power stations, and invest now in energy technology that has a chance of being sustainable for the long run. If we are lucky enough to find another uranium mine in 2080, we can refurbish one of the existing nuclear power stations at that point. But that is such a long shot that the only way anyone could make a major investment in it now is if they are not thinking ahead.

Tuesday, February 9, 2010

The Tylenol recall, from pills contaminated with a mold-related chemical, continues to expand. Yet my initial thought, that this could permanently damage the Tylenol brand, proved to be an overreaction.

The maker of Tylenol is probably not even done announcing the recall — additional product lots were added last weekend — but the story is four weeks old, and the news media has moved on.

Johnson & Johnson still needs to find the source of the mold. The explanation offered so far, that it came from transportation pallets, is not entirely convincing, though it is a step in the right direction. If this incident can persuade the pharmaceutical industry to stop using wooden pallets to transport the empty pill containers from the container factory to the pill factory, and switch to a material that can be routinely cleaned, that can only help. In defense of Johnson & Johnson, its technicians are having to trace micrograms of a highly irritating chemical, which is not an easy task. It is hard to find simply because the amount is so small.

But as long as the news doesn’t get worse, Johnson & Johnson doesn’t need to worry about any lasting damage to the Tylenol brand. The proof of this is found in the dozens of talking heads and columnists comparing the new Toyota recalls to the Tylenol recall of a generation ago — all of them completely forgetting that Tylenol is in the middle of an equally problematic recall right now.

What this tells you is that the news doesn’t have the reach it once had. If people who work for the news media have already forgotten one of the top stories of last month, what are the chances of the story sticking in the minds of the general public?

Toyota, for its part, can take heart from this effect. Assuming Toyota proceeds to solve its pedal problems, its current difficulties may be forgotten just as quickly.

Monday, February 8, 2010

In the wake of a historic snowfall in Washington, perhaps snow removal can help make the case for deficit spending. It makes sense for the government to borrow money, if necessary, to remove snow from streets. The main reason it makes sense economically is that the snow removal makes sense economically — it helps people get to work, and as a result, they create things of value. The net result is more value than if the snow had not been removed.

When people create more value, the ultimate result is that the country is more valuable, and therefore, the currency is more valuable.

Most of the people who are worried about deficit spending, along with most of the people who advocate deficit spending, are not making the right distinctions about the value created by the spending. In a time of high unemployment, putting people back to work is not just a way to get the economy on track — in fact, it doesn’t necessarily accomplish that. But it does allow something of value to be created by the people who would otherwise not be working, an opportunity that is lost forever if it is not taken. The people who are saying we need to “tighten our belts” on things like snow removal are focusing too much on the money and forgetting the value of work.

There are endless government projects that have the same kind of economic rationale as snow removal. If it were politically feasible, the federal government should borrow or even print about $250 billion right now for energy improvements in government-owned buildings. The best case for this is for the buildings owned by the federal government, but with states in such distress and unemployment as high as it is, it would make sense to extend this to state government buildings. This work makes financial sense because the energy investments are earned back in lower utility bills within 3 to 4 years. It makes sense in job terms because there are a million unemployed workers who have construction experience and would need little or no training to do the work involved. It is not inflationary because in monetary terms, it makes little difference whether the government is paying interest to foreign bondholders or is paying for energy derived from imported oil. This kind of borrowing adds to the federal government’s ability to borrow because it strengthens its financial position, making it more able to make its debt payments.

Some of the $200+ billion in stimulus spending that was approved a year ago as part of the economic recovery bill and is now being spent fits this kind of profile. Some of it does not. Congress does not seem to know how to make this distinction. But there is a need for more deficit spending on projects like these that are viable short-term investments in financial terms. Too much emphasis is being placed on long-term investments, where the payback may be 5 to 10 years away. Many of those can be saved for better economic times. Too much emphasis, also, is being placed on make-work projects, like the Cash for Clunkers program. And there is far too much discussion of business tax cuts that are supposed to result in businesses making long-term investments. That kind of budget deficit leads to inflation. Borrowing money for things like snow removal does not.

Sunday, February 7, 2010

Much of the East Coast experienced a major snow event this weekend. In this kind of storm, there is so much snow to remove that you don’t count on the snow plows coming by within 24 hours. I have a hunch, though, that all the streets will be cleared before the Super Bowl starts.

As I was out with my shovel doing my part in the snow removal, I was struck by the scale of the process. I single-handedly made a snow pile larger than my car. Then a front-end loader came by and was moving snow half a ton at a time. And this is just what was happening in the area of one house. In terms of the amount of solid material moved, snow removal ranks as one of the largest activities of the industrial age. In a storm like this, a snow plow may move a ton of snow every five meters, and there are more snow plows in the world than I can imagine. Snow removal makes cold-weather cities like Novosibirsk possible, and it makes many of the great cities of the world far more productive in winter.

If we don’t pay so much attention to snow removal, it is because it is highly productive and rarely controversial. The more unproductive and controversial work gives the appearance of making up most of the economy. Yet in truth, the work we take for granted, such as snow removal, is just as important.

Saturday, February 6, 2010

Quarterly reports from Mastercard and Visa show declines in credit card use again this quarter, as people use debit cards more often. The shift to debit cards has benefited Visa, which has the largest share of debit cards. However, the shift toward Visa is probably not a durable trend. Anecdotal reports suggest that people who shift from credit cards to debit cards have a tendency to shift again, from debit cards to cash, after they experience the various risks involved in debit card use.

Friday, February 5, 2010

Developments this week: More evidence that AIG’s insurance operations are a tangled mess, as one of the insurance units admitted it had guaranteed billions in credit default swaps. ◾ Citigroup plans to address the conflicts of interest inherent in private equity by selling or spinning off that business unit. Observers estimate that Citi’s private equity business could be worth $10 billion. ◾ Venezuela’s government has been weakened politically by the banking crisis there, with President Hugo Chavez’s approval rating falling below 50 percent for the first time. It didn’t help that a few of the owners of the failed banks had close ties to the government. ◾ There are new New York State civil charges against Bank of America and two of its executives, adding to the growing pile of legal headaches at the bank. The main significance of the new charges is they could lead to additional charges against other bank executives and possibly government officials, if more of the story of the bank’s dealings comes out. ◾ Argentina has appointed a new central banker, a move that investors worry will open the door to a new inflationary spiral in that country.

Another bank failed tonight because of loan participations. Officers at 1st American State Bank of Minnesota, a small bank with $16 million in deposits and offices in Hancock and Benson, in the western part of Minnesota, thought they were minimizing risk by buying small shares in loans for real estate projects all over the country. Instead, so many of the projects failed that, tonight, the bank failed.

Just the vacant land left behind by some of the failed projects is worth more than the total assets of the failed bank, and I have to ask whether it makes sense for a bank this small to be lending to a project that is so much bigger than it is. The idea behind loan participations makes sense, at least it sounds like it does, but as the number of banks killed by loan participations continues to grow, I am forced to conclude that there is something terribly wrong with the way banks have been conducting loan participations. It seems to me that the reason the originating banks were so eager to syndicate some of their loans was that the loans had obvious problems from the outset. In other words, the availability of syndication seems to lead originating banks to go ahead with loans that they would never approve if they knew they would be stuck with them. The correct course of action in this case is not to syndicate the loan, but to decline it. The participating banks, for their part, sometimes seem to view loan participations as a way to get out of the expense of underwriting loans. The recent evidence, though, is that careful underwriting of loan participations is more important than for original loans.

In a way, these are the same problems we see in mortgage-backed securities, but the difference is that loan participations occur entirely within the banking system and lead not to investor losses, but to bank failures. If the loan participation business too often ends up in the question of who is left holding the bag, tonight the answer is, again, the FDIC.

The successor bank for 1st American State Bank of Minnesota is Community Development Bank, also based in western Minnesota. It is taking over the deposits and purchasing the assets.

Thursday, February 4, 2010

The jobs report again today reflected the unprecedented local government layoffs taking place, a trend that economic forecasters seem not to have recognized yet. Initial claims for unemployment benefits continue to hover around half a million per week.

The local government layoffs, along with some from state governments, should begin to fade this month, but they will be replaced by layoffs in retail and big business, many of which were announced last month.

In April and May, I expect to see something of a respite in the jobs data, but it will not last long, as the next round of state government job cuts will hit in June and may extend into September.

Wednesday, February 3, 2010

LED technology for interior lighting improved energy efficiency by 30 percent last year, and now, it is on the verge of a key pricing threshold.

The energy cost of operating a 60-watt incandescent light bulb continuously for a year is, according to a rule of thumb, about $60. The price of an LED array to replace a 60-watt light bulb is now about $65 to $85. At the low end, the price could fall below $60 any day now.

The cost of installing a traditional light bulb and operating it for one year is now about the same as that of installing an LED array and operating it for one year. The comparison is particularly relevant for lights that have to be on all the time. The one-year comparison is important because it reflects a common budget window. In many places, if you can put a cost-cutting measure in place and have it pay back within the budget year, that’s when it will start to happen. A lower-level manager can go ahead and do it without special budget approval.

Only a small fraction of lights are on all the time, of course, and most of the energy in lighting goes into lights that are on about half of the time. It may be another two years before we can see a mass movement to convert these lights to LED arrays. But for lights that are on almost all the time, that’s a transition we will start to see this year.

Tuesday, February 2, 2010

Boeing is projecting revenue for 2010 to be 5 percent less than last year. The bigger dropoff could come in 2011, though, as aircraft orders being placed now for manufacture next year are declining, according to a Reuters report, not just at Boeing but also at Airbus.

The value of an airplane depends a great deal on the cost of operating it, much of which is the cost of fuel. Part of the reason for the decline in airplane orders is the projection of rising fuel prices over the next ten years. With the global economy recovering, and in the absence of reforms in the way crude oil is traded, there is nothing to stop world oil prices from going higher than they were at their peak two years ago. The projections from Boeing of declining orders reflects, I believe, a consensus view among companies in the transportation sector that oil prices will be going higher.

Monday, February 1, 2010

According to a Reuters report, a group of scientists in London has succeeded in synthesizing integrase, an enzyme that is a key step in the replication of genetic viruses such as HIV. It was a step that had eluded scientists for years because of the difficulty of creating a crystal of the enzyme. But after 40,000 attempts, the research team succeeded in creating the crystal.

With integrase on hand, scientists will be able to observe the way integrase functions and the way integrase blockers, including some popular anti-AIDS drugs, work. It could lead to the design of a drug that could be a partial cure for all genetic viruses, including HIV.